The Federal Reserve raised its benchmark interest rate by 0.75 percentage points on Wednesday in an effort to cool rising costs of consumer goods and services.
While economists say a rate hike will help cool consumer demand and hope to ease record high inflation, it will also increase the cost of borrowing for everything from homes to auto loans. Low-income families with credit card debt — those with an average income of $16,290 per year and $35,630 per year — typically have a higher debt-to-income ratio than wealthier Americans, according to Federal Reserve data.
““People are starting to put their basic needs and daily expenses on their credit cards.”“
Seshagiri said most of the people her group serves are hourly wage earners – who make their living by the number of hours they work in any given week – and need a car for their daily commute, either because they live in rural areas where there is public transportation. Not available, or because they work night shifts. She added that they were hit hard by the rise in food and gas prices.
“People are starting to put their basic needs and daily expenses on their credit cards,” Seshgiri said.
Inflation hit a 41-year high in June, with prices for consumer goods and services up 9.1% from a year earlier. Grocery prices last month rose 12.2% over the year, and gas rose more than $1 from the same period last year to $4.25 on Thursday.
However, the recent rise in the cost of living has had a greater impact on rural America, according to a report by Iowa State University professor Dave Peters, who has studied the impact of inflation in small towns. “The biggest inflationary impact on rural households has been an increase in the cost of transportation, which is necessary in rural areas where residents have to drive longer distances to get to work, school or shopping to meet daily needs.” Peters Books.
The report found that rural residents pay $2,470 more annually for gasoline and diesel fuel than they did two years ago, while urban residents pay an additional $2,057.
Savings are running out
Americans were already dipping into their savings to cover the rising costs. The personal savings rate — the percentage of disposable income people save — fell to 5.4% in May from 10.4% in May 2021, marking one of the lowest levels in decades, according to the Bureau of Economic Analysis.
“At some point, these savings will run out,” Seshagiri added.
About 40% of Americans said they already rely more on their credit cards because of inflation, according to a recent Forbes Advisory survey.
“Excessively high inflation tends to undermine consumers’ purchasing power, especially if their wages or other sources of income do not increase,” according to a report from Michael Fisher, an analyst at financial website TradingPedia. “So, to counteract the rising cost of living, consumers may need to borrow.”
“The delinquency rate for credit card debt was 1.73% in the first quarter of 2022, up from 1.48% in the first quarter of 2021.“
Meanwhile, the delinquency rate on credit card debt was 1.73% in the first quarter of 2022, up from a recent low of 1.48% in the first quarter of 2021, according to the Federal Reserve.
As the cost of borrowing increases, Seshagiri said, Americans with lower incomes and their credit scores may be more vulnerable.
“As they put their spending on these credit cards and we see an increase in interest rates, credit card balances will increase,” he said. “So this is a heavy burden for these people to bear these interest rate increases.”
It will hurt those already struggling to make their minimum monthly payments, she said. It said it would likely lead to more defaults, and thus hurt their credit scores, she said.
“This will ultimately limit these people from eventually buying a house… all those things that help people invest in their family or go to work,” Seshagiri added.
She said lower-income Americans may have a harder time buying used cars. Early in the pandemic, chip shortages forced many car manufacturers to stop production and inventory shortages drove up prices for new cars. Consumers turned to used cars, driving up those prices.
The average used-vehicle listing price rose to $33,341 in June, up 0.5% from the previous month and $172 below its peak price in March, according to a recent report from auto shopping app CoPilot. The current list price for used cars is one of the highest ever.
Peters noted that people in rural areas see faster cost gains in used cars and trucks than those who live in cities, in part because people who live in cities tend to have more public transportation options.